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teleserv
Level 1

Question about single member owner of an LLC taxed as an S Corp and owner distributions

I am a single member owner of an LLC taxed as an S corp. I pay myself a reasonable salary, and also recently started taking distributions. Let's say my company has $200,000 in net profit at the end of this year, and from that next profit I took distributions of $50,000 (on top of my salary). In that scenario, when I file the business taxes would I pay taxes on the full $200,000 and would I then also have to pay personal income tax on that $50,000 in distributions?  Or, would the business only be taxed at a profit of $150,000 and then I would pay personal income tax on the $50,000 in distributions?

2 Best answer

Accepted Solutions
tagteam
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions

You are taxed on the full amount of the net income generated by the S corporation.

 

However, the net income should exclude your "reasonable salary" as you should have taken that salary in the form of payroll (and, as a result, the salary would have reduced the S corporation's net income).

 

Therefore, the $50,000 in net income (in your example) would be taxable to you (as passed through on your K-1), but would not be subject to self-employment tax. 

 

Question: With respect to the hypothetical $150,000 you took as your salary, did you file 941s for withholding, etc., and issue yourself a W-2?

View solution in original post

tagteam
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions


@teleserv wrote:

Let’s say the total revenue my business generates this year is $400k. I take $100,000 in salary. And the business has $100,000 of expenses. And I take a $50,000 distribution. So I personally have earned $150,000 in income and the business has a net profit of $150,000.


If the business had gross income of $400k, you took $100k in salary, and the business had $100k in regular business expenses, then the net profit would be $200k ($400k - $100k - $100k).

 

Your salary will be reported on your W-2 and that salary will be deducted from the corporation's gross income. Your K-1 should then show ordinary business income of $200k (on Line 1 of Part III).

 

The $50k distribution you took does not have an impact on the corporation's net income (i.e., does not reduce net profit) for its tax year.

View solution in original post

16 Replies
tagteam
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions

You are taxed on the full amount of the net income generated by the S corporation.

 

However, the net income should exclude your "reasonable salary" as you should have taken that salary in the form of payroll (and, as a result, the salary would have reduced the S corporation's net income).

 

Therefore, the $50,000 in net income (in your example) would be taxable to you (as passed through on your K-1), but would not be subject to self-employment tax. 

 

Question: With respect to the hypothetical $150,000 you took as your salary, did you file 941s for withholding, etc., and issue yourself a W-2?

Critter-3
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions

You have to understand that "draws" you take as an owner of the corp  is NOT reported anywhere on your form 1040.  The net profits are sent to the 1040 via the K-1 form and you are taxed on that profit in the year it is earned even if you did not take any draws from the company account in the year you earned/were taxed on it.  This is a basic bookkeeping concept  and if you are at all confused about this situation then please get educated.  A sit down with a local bookkeeper/tax pro would be wise if you need help with your bookkeeping and/or get a good bookkeeping program  and/or do some research on your own.

teleserv
Level 1

Question about single member owner of an LLC taxed as an S Corp and owner distributions

Tagteam, thanks for the reply. The $150,000 was not the salary I would take, but the net income of the business itself. And yes, my actual salary does get me a W2.

 

In my scenario as a single member LLC taxes as an S - Corp, I have a business return to file and a personal return to file, correct?  So are you saying my business would not be paying any tax on the $50,000 distribution I take because the tax liability is passing on to me? Is that right?  If so, then how would I figure out the tax liability my business would owe on the $150,000 net profit the business made (after payroll, expenses, and the $50,000 distribution)?

Critter-3
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions

The S-Corp form 1120-S (due 9/15 if you put it on extension back in March) is completed first and pays NO income taxes at the corporate level.  It will produce a K-1 form showing the profit that is being passed thru to the personal return along with the W-2 that was issued.   

tagteam
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions

You have to file your personal income tax return (Form 1040), of course, but the S corporation must file Form 1120-S and issue you a K-1.

 

See https://www.irs.gov/instructions/i1120s#en_US_2021_publink11515kd0e292

 

Note that there is difference between "distributions" and "net income". If you are not conversant with these terms, you really need to consult with a tax professional in your area.

 

See https://taxexperts.naea.org/listing/service/corporations

VolvoGirl
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions

If you need to file a separate Business return like for a 1065 Partnership or LLC or a 1120 including a Single Member LLC - S corp or a 1041 Estate/Trust return you need Turbo Tax Business in addition to a personal tax program.  


You need to buy Turbo Tax Business, not to be confused with the personal Home & Business version. TT Business is not available to do online or on a Mac. You can buy the Windows Desktop program here,
https://turbotax.intuit.com/small-business-taxes


Window System Requirements
https://ttlc.intuit.com/community/system-requirements/help/minimum-system-requirements-for-turbotax-...

tagteam
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions


@teleserv wrote:

Tagteam, thanks for the reply. The $150,000 was not the salary I would take, but the net income of the business itself. And yes, my actual salary does get me a W2.


Who does your payroll? I assume that would either be a payroll service, an accountant or other tax professional.

 

If it is one of the latter, then I would recommend that you consult with that individual or firm for the preparation of your business income tax return (Form 1120-S) rather than try to prepare the return yourself using TurboTax Business.

teleserv
Level 1

Question about single member owner of an LLC taxed as an S Corp and owner distributions

Let’s say the total revenue my business generates this year is $400k. I take $100,000 in salary. And the business has $100,000 of expenses. And I take a $50,000 distribution. So I personally have earned $150,000 in income and the business has a net profit of $150,000. What I am trying to figure out is does the business have any tax liability at all, and if so what is it, or does all the tax liability just passed through directly to my personal return?

tagteam
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions

The income tax liability all gets passed through to you via your K-1 (1120-S).

tagteam
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions


@teleserv wrote:

Let’s say the total revenue my business generates this year is $400k. I take $100,000 in salary. And the business has $100,000 of expenses. And I take a $50,000 distribution. So I personally have earned $150,000 in income and the business has a net profit of $150,000.


If the business had gross income of $400k, you took $100k in salary, and the business had $100k in regular business expenses, then the net profit would be $200k ($400k - $100k - $100k).

 

Your salary will be reported on your W-2 and that salary will be deducted from the corporation's gross income. Your K-1 should then show ordinary business income of $200k (on Line 1 of Part III).

 

The $50k distribution you took does not have an impact on the corporation's net income (i.e., does not reduce net profit) for its tax year.

teleserv
Level 1

Question about single member owner of an LLC taxed as an S Corp and owner distributions

Thank you. One follow up question…as far as saving up during the year to prepare for taxes that will be owed, is it best to save those funds in the business account and have the business pay whatever taxes are owed come tax time, or to transfer that money over to my personal account throughout the year in preparation for tax time?

tagteam
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions

One thing to note, @teleserv, is, based on the figures you posted, there could be an issue with $100k being considered a "reasonable salary".

 

See https://www.irs.gov/pub/irs-news/fs-08-25.pdf

teleserv
Level 1

Question about single member owner of an LLC taxed as an S Corp and owner distributions

@tagteam because it’s too high or because it’s too low? 

tagteam
Level 15

Question about single member owner of an LLC taxed as an S Corp and owner distributions

@teleserv 

 

Your business entity (an LLC treated as an S corporation for federal income tax purposes) is a pass-through entity and, as such, does not incur federal income tax liability (which is passed through to you, personally). 

 

As a result, you should have sufficient funds to cover your individual federal (and state, if necessary) income tax liability and make any necessary estimated tax payments.

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